Commentary on a Foreign Affairs Article
In describing what they characterize as “market-creating innovation,” Bryan Mezue, Clayton Christensen, and Derek van Bever (“The Power of Market Creation,” Foreign Affairs, January/February 2015) underscore its importance in achieving transformative growth and prosperity in developing nations. It is the keystone of a strategy aimed at spurring broad-based and sustainable economic growth, especially in non-consumption economies (those in which markets are not driven by cost-sensitive consumers).
The article discusses three types of innovation that drive economic and employment growth. These types of innovation include “sustaining innovation” which replaces products with new or better ones, “efficiency innovation” which helps companies produce more for less, and thirdly and most importantly for the sake of international development, “market-creating innovation” which transforms products and services from emerging industries into cheap and accessible goods and services that reach a new population of customers.
An ostensible notion exists in the ‘development realm’ which holds that all three aforementioned types of innovation in the private sector can be levers that spur economic prosperity and job creation. The authors challenge this notion by positing that only “market-creating innovation” creates new markets and spurs job growth over the long term while many programs incentivizing and bolstering “efficiency” and “sustaining” innovation fall short of their goals. This is true because picking winners (for example supporting growth in sectors that enjoy high growth rates in market share and relative market size) can reduce employment over the long term if development programs focus only on increases in efficiency. For example, investments in resource industries in developing nations lead to efficiency innovations, designed to produce more with less. They reduce the cost of operations for firms in the area, but do not directly lead to more jobs - and the sustained growth and prosperity that result from more people being employed. When efficiency innovations work, it is when they are embedded within market-creating innovations. If growth from market-creating innovations is greater than the rate of reduction caused by increased efficiency, an economy can be bolstered.
One of the strongest levers to spur employment growth is the decision for entrepreneurs and businesses to spend, invest, and hire - which is driven by the innovative creation of a new market. When market-creating innovation occurs, since many more people now buy a product or service, innovators need to hire more people to make, distribute, support, and service them. For example, Kenya’s M-Pesa service addresses the lack of consumption of banking services in the country by offering a wireless telecommunications service, which increased the amount of Kenyan bank users by 400% in 8 years. This is a market-creating innovation - a perceived need in a non-consumption economy is being addressed. A gap in the market is now filled, and innovative thinking and an economic platform provide the foundation for its success.
Mezue, Chistensen, and van Bever posit that market-creating innovation brings permanent jobs that create prosperity. High-mass, high-growth, high-market share sectors can be winners in a modern economy, but when employment growth is the end goal, market-creating innovation (coupled with entrepreneurial and innovative spirit) will lead to the most job growth. Members of a labor market in a non-consumption economy should be educated and trained with analytical soft skills in order to better recognize unfulfilled gaps in the marketplace. By combining entrepreneurial spirit with the analytical ability to recognize opportunities for innovative ventures, entrepreneurs can create prosperity and long-term, sustainable economic and employment growth.
Decision makers intending to spur sustainable economic growth and accompanying employment growth need to shift their thinking from a top-down approach focused on investing in efficient sectors and enterprises to a strategy that encourages both the public and private sector to support market-creating innovations. By doing so, these new markets will lead to more jobs and satisfaction of unfulfilled needs in the market, resulting in sustained prosperity over the long term.
Click here for the original article, including an audio recording, on the Foreign Affairs website.